From the Vol.1 No.18 issue of Electronic Intelligence Weekly

World Financial System Enters the Obituary Phase

by John Hoefle

July 2 (EIRNS)—With major corporations exploding like July 4th fireworks, global stock markets plunging from bubbly effervescence into the abyss, and financial crises spinning out of control from Brazil to Japan, panic is spreading wildly. The much-hyped second-quarter recovery never materialized, and despite the insistence by the spin-doctors that the economy is fine even if the markets aren't, the realization is growing that the global economy is in a free-fall.

The phase shift the world economy is undergoing, is signalized not just by the stock-market blowout, but by the dollar collapse and the flight out of the dollar, for safer-haven currencies; and by the Ibero-American debt crisis, with the two leading countries in crisis being Argentina and now, Brazil.

Under these circumstances, economist and Presidential candidate Lyndon LaRouche assesses that the world is facing, in the weeks ahead, a period of increased political and financial turbulence, in which it will become impossible to manage the financial/economic system. This period of turbulence, he expects, cannot go much beyond late August, September, or, at the latest, October—and therefore, we can expect to see horrible military adventures—perhaps generalized war—by that time.

As usual, in the unreal world of the financial system itself, attempts are being made to blame the problems on corporate "rogues," whose greed has victimized an innocent system, but the scapegoating becomes less effective with every negative event. The problem lies not in some abuse of the system, but in the system itself—it is the desperate attempt to keep the system afloat that has spawned this rash of corporate bookkeeping fiction, and what has been revealed so far is just the tip of the iceberg of hidden losses, inflated assets, and walking dead.

LaRouche's intervention is the critical antidote to this collapse. The growing calls by speculator George Soros and others for a new "wall of money" to bail out the system would only intensify the rush into hyperinflation triggered by a similar move during the near-meltdown of the global financial system in 1998. Only LaRouche's New Bretton Woods proposal, with its orderly shutdown of the bankrupt globalist system and a return to sound physical economic principles, can avert the growing chaos. It is, literally, LaRouche or bust. - Wall of Money -

In mid-1997, in response to a largely hidden derivatives crisis, the big Anglo-American financial institutions launched a money-grabbing financial warfare operation against the nations of Southeast Asia. This looting binge, known in the West as the "Asian crisis," was breathtaking both in its criminality and in its stupidity; by knocking out the fastest-growing region of the world's economy, the bankers also knocked out a chunk of Corporate America's foreign-trade profits. The financiers continued their rampage into 1998 with a renewed assault on Russia.

In the autumn of 1998, Russia struck back with a debt moratorium and devaluation, sending the speculators into panic. The global financial markets seized up, as investors fled to the relative safety of U.S. and German government bonds, resulting in the public collapse of the giant Long-Term Capital Management hedge fund and the silent collapse of more prominent institutions.

Western governments and central banks responded with what became known as the "wall of money," flooding the market with liquidity and encouraging whatever bookkeeping tricks were necessary to restore the appearance of solvency and thus public confidence. - The Viagra Curve -

One result of the wall of money was a sharp rise in major world stock markets, which had plunged during the "Russian crisis." From their autumn 1998 lows to their peaks in early 2000, the Nasdaq rose 256%, the Russell 2000 rose 95%, the Wilshire 5000 rose 71%, the S&P 500 rose 60%, and the Dow Industrials rose 56%, while the major French index rose 134%, the German 109%, and the Italian 108%. With the March 2000 collapse of the Nasdaq, global markets started a slide from which they have not recovered—and will not recover. From their early-2000 peaks through June 28, 2002, the Nasdaq is off 71%, the Wilshire is off 36%, the S&P 500 is off 35%, the Russell 2000 off 24%, and the Dow off 21%. In Europe, Germany is off 46%, France 44%, Italy 41%, and England 33%, while the Japanese Nikkei is down 49%.

The exact numbers are not as important as the process they reflect, a sharp rise in the market due to the injection of what might be termed financial Viagra, and a sharp falloff after the stimulus wears off.

World markets are now back to the levels of 1997 and early 1998, but supporting much higher levels of debt and other financial aggregates, making the situation much more dangerous. One reflection of this danger, is the string of high-profile corporate blowouts now underway. - The Obituary Phase -

Take, for example, the dramatic collapse of WorldCom, which suddenly discovered some $3.8 billion in profit overstatements and evaporated nearly overnight. Contrary to the public statements, the problems at WorldCom have been known to financial and regulatory institutions for months, and were behind the exit of the company's former chairman, Bernard Ebbers, at the end of April.

WorldCom, built by scores of acquisitions and failing under the weight of some $30 billion in debt, had actually been falling since June 21, 1999, when its stock peaked at $64.50 a share; a year later, it had fallen to $40 a share, and to $15 a share in June 2001. At the beginning of June 2002, it was trading at just $1.55 a share. On June 25, WorldCom stock closed at $0.83 a share; the profit overstatement was announced after the market closed that day, and trading in WorldCom stock was halted the following day. When trading reopened July 1, investors fled the stock, dropping it to $0.06 a share.

The revelation of its problems served as WorldCom's death announcement. This obituary phase, in which the demise of WorldCom was announced, was carefully stage-managed to prevent panic in the markets and among the population. It was, in many respects, a replay of the Enron affair.

There will be many more such obituary notices in the coming months, as companies bigger than Enron and WorldCom announce their demise. Xerox, which overstated its income by $6 billion, is one to watch, and rumors have been swirling—and denied—that General Motors has been cooking its books. Another company to watch is General Electric, which gets about half its profits from its financial arm, and is a significant player in the derivatives markets. General Electric has made hundreds of acquisitions in recent years, giving it plenty of opportunity to play accounting games, and is known for manipulating its financial statements to "hit the numbers" every quarter.

Then there are the banks, led by J.P. Morgan Chase and Citigroup, which are not only holding billions of dollars of bad loans from these zombie companies, but are likely playing even wilder games with their own derivatives portfolios.

The global economy is now on the down side of the mountain, headed for the deep valley. The only real questions for the markets are how far, and how fast, they will fall. What we have seen so far, is just the beginning.

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